Debtor May Avoid County Tax Foreclosure Sale

Posted by NCBRC - April 27, 2021

A county’s tax sale of the debtor’s farm was avoidable as constructively fraudulent under section 548, where the debtor was insolvent at the time of the title transfer and the tax debt was substantially less than the fair market value of the property. DuVall v. County of Ontario, No.19-20179, Adv. Proc. No. 19-2011 (Bankr. W.D. N.Y. Feb. 18, 2021).

In satisfaction of a $22,400 property tax lien on the debtor’s 50-acre farm, Ontario County obtained a default judgment of foreclosure and obtained title to the property. The county then sold the property at auction for $91,000. The debtor filed for chapter 13 bankruptcy and, a few weeks later, filed an adversary proceeding seeking to avoid the transfer of title as constructively fraudulent under sections 522(h) and 548(a)(1)(B).

The court relied heavily on its earlier decision involving the same situation. In In re Hampton, Case No. 17-2009, 2020 Bankr. LEXIS 447, at *12-13, aff’d, Hampton v. Ontario Cty., 588 B.R. 671, 674 (W.D.N.Y. 2018), the court set out the relevant legal framework as: “The Bankruptcy Code empowers a trustee to set aside a constructively fraudulent conveyance, if the following elements are proved: (1) the debtor had an interest in the property; (2) a transfer of the property occurred within two years of the filing of the bankruptcy petition; (3) the debtor was insolvent at the time of the transfer or became insolvent as a result of the transfer; and (4) the debtor received less than reasonably equivalent value in exchange for the property transfer. 11 U.S.C. § 548(a)(1)(B). And under § 522(h) of the Code, the debtor may avoid the transfer of that property if: (1) the transfer was not voluntary; (2) the property was not concealed by the debtor; and (3) the trustee did not attempt to avoid the transfer. 11 U.S.C. § 522(h) and (g)(1). The party seeking to avoid a constructively fraudulent transfer has the burden of proving each element by a preponderance of the evidence.”

Here, there was no dispute that the debtor met the elements of section 522(h). The only factual issues in dispute were whether the debtor receive less than the reasonably equivalent value, and whether the debtor was insolvent at the time of the transfer.

With respect to the question of reasonably equivalent value, the court looked to whether the debtor was in essentially the same financial condition before and after the conveyance. The court found that the purchase price represented the fair market value of the farm and that “[e]xpunging a $22,434.40 tax lien, in exchange for title to property worth $91,000, represents a purchase price equal to 24.65% of the value of the property. The Court holds that a purchase price equal to 24.65% of a property’s fair market value is not reasonably equivalent to the value of the property.”

The county next maintained that the debtor was not insolvent when title transferred. Section 101(32)(A) defines insolvency as debts exceeding assets. Assets do not include property which the debtor may claim as exempt. When she filed for bankruptcy, the debtor owned a checking account containing $1,319.28 for which she claimed only a $100.00 exemption. The court found, however, that she could have claimed the entire amount as exempt under section 522(d)(5). Therefore, her assets were $0. Even though some of her debts were in dispute, the court found she had an undisputed $711.29 in medical debt that tipped her balance into insolvency.

The court turned to the county’s affirmative defense that the debtor lacked standing to bring the avoidance action under section 522(c)(2)(B). That section provides, “property exempted under this section is not liable during or after the case for any debt of the debtor that arose . . . before the commencement of the case, except” a tax lien. Section 522(h), however, gives a debtor standing to “avoid a transfer of property of the debtor or recover a setoff to the extent that the debtor could have exempted such property under subsection (g)(1) of this section if the trustee had avoided such transfer.” In Hampton, the district court stated: “The County interprets Section 522(c)(2)(B) as barring the Appellants from claiming the federal homestead exemption, when it merely provides that exempt property remains liable for a tax lien. See 11 U.S.C. § 522(c)(2)(B). [The Debtors are] not attempting to avoid paying the tax liens on their respective properties; they are attempting to avoid a transfer of the property [under section 548].” The court therefore found the debtor had standing to seek avoidance.

The also rejected the county’s argument that policy considerations favored a finding in its favor because only the debtor stood to benefit from avoidance. The court again relied on Hampton, where the district court affirmed that bankruptcy is intended to afford a debtor a fresh start, and even though avoidance would not lead to liquidation of the asset for the benefit of creditors, the tax debt would be paid through the bankruptcy and unsecured creditors would receive their share of the estate. Therefore, avoidance promotes bankruptcy policy considerations.

The court turned to section 550(a) which provides that upon avoidance of a transfer “the trustee may recover, for the benefit of the estate, the property transferred, or, if the court so orders, the value of such property, from, the initial transferee.” The “benefit of the estate” is interpreted broadly to encompass either direct payments to creditors from the recovered property, or increased likelihood of successful completion of the debtor’s plan by virtue of her recovery of the property. “Here, the Court finds that return of title and possession of the farm to Ms. DuVall will provide an indirect but important benefit to the estate—it will greatly increase the probability of a successful reorganization under the Chapter 13 plan.” Because the county had not yet transferred title to the auction purchaser, the court ordered the county to turn the title over to the debtor.

As a final matter, the court denied the county’s motion to dismiss the debtor’s chapter 13 case under section 1307(c) which the county made in its post-trial brief. Calling it “trial by ambush,” the court found the motion did not give the debtor adequate notice to address the issues raised.

The county has filed an appeal to the District Court for the Western District of New York, No. 21-cv-6236.

Duvall Bankr WD NY




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